Einstein Bros 2002 Annual Report Download - page 12

http://www.sec.gov/Archives/edgar/data/949373/000104746903027186/a2116520z10-ka.htm[9/11/2014 10:14:22 AM]
that demurrer, we procured a dismissal without prejudice of the claims brought against Paul Murphy, the only individual defendant we employed
subsequent to our acquisition of Einstein. The plaintiffs subsequently stipulated to the severance of the claims against us and those against the
remaining individual defendants. The stipulation provides that the plaintiffs will file separate second amended complaints against us and against the
remaining individual defendants. As a result, our demurrer will be taken off the calendar. We will have thirty days from the date of the filing of the
second amended complaint to refile our demurrer.
On March 31, 2003, Jerold E. Novack, our former Chief Financial Officer, Secretary, and shareholder, filed a complaint in the United States
District Court for the District of New Jersey against us, Anthony D. Wedo, our Chairman and Chief Executive Officer, and William J. Nimmo, a
member of our Board of Directors. The complaint purports to state claims for breach of plaintiff's employment contract with us, breach of our
fiduciary duties to plaintiff, defamation, and violation of the New Jersey
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Conscientious Employee Protection Act, and in addition seeks a declaration that our termination of plaintiff "for cause" was invalid. As a basis for
his purported claims, the plaintiff alleges that we wrongfully contended certain bonuses he received were unauthorized and that he was wrongfully
terminated for cause in order to deny him certain other benefits allegedly owed under his employment agreement. Furthermore, the plaintiff asserts
that he was defamed by certain of defendants' public statements regarding his dismissal and also that his termination was in retaliation for certain
actions he believes were protected by the New Jersey Conscientious Employee Protection Act. We intend to vigorously oppose plaintiff's purported
claims. We were served with the complaint on May 2, 2003 and have not yet answered or otherwise responded to it.
In July 2002, the New Jersey Division of Taxation entered judgment in the amount of $5,744,902, plus costs, against Manhattan Bagel
Construction Company, a wholly owned subsidiary of Manhattan Bagel Company. This judgment represents amounts for corporate income taxes
for the period from 1996 to 2000 and sales and use taxes for the period from 1995 to 1997. At that same time, the New Jersey Division of Taxation
provided Manhattan Bagel Construction Company with a Notice and Demand for Payment of Tax in the additional amount of $130,200 for
corporate income taxes and sales and use taxes for the period from October 2001 through June 2002. Manhattan Bagel Construction Company
ceased operations in or about early 1997 and has existed since that time only as a non-operating entity with no assets. Therefore, we are currently
working with the New Jersey Division of Taxation to have all tax assessments for the period after Manhattan Bagel Construction Company ceased
operations removed and that portion of the judgment deemed satisfied. With regard to taxes imposed for the period prior to early 1997, we believe
those amounts are barred from being asserted against Manhattan Bagel Company, to the extent they otherwise could have been, because they were
not asserted in Manhattan Bagel Company's November 1997 bankruptcy proceeding.
On February 23, 2000, New World Coffee of Forest Hills, Inc., one of our franchisees, filed a demand for arbitration with the American
Arbitration Association (American Arbitration Association, New York, New York, Case No. 13-114-237-00) against us alleging fraudulent
inducement and violations of New York General Business Law Article 33. The franchisee seeks damages in the amount of $750,000. We have
asserted a counterclaim in the arbitration seeking amounts owed under the franchisee's franchise agreement and monies owed for goods purchased
by the franchisee in the amount of $200,000. An arbitrator has been selected and document exchange is complete. Hearings were scheduled for
June 2002 but have been postponed by order of the arbitrator.
On October 28, 2002, Sansim Patel, Inc., a subfranchisee of Manhattan Bagel Company, filed suit against Manhattan Bagel Company, the
master franchisee, and others in Orange County (Orlando, Florida). The plaintiff alleges claims of civil conspiracy and unjust enrichment against
Manhattan Bagel Company and seeks rescission of its franchise agreement with Manhattan Bagel Company. The plaintiff also seeks damages in an
unspecified amount. In December 2002, we filed a motion to dismiss all of the claims asserted against us by the plaintiff, based in part on a general
release the plaintiff had previously executed in favor of Manhattan Bagel Company. That motion remains pending with the Court. However, on
March 18, 2003, default judgments were obtained against the other named defendants.
On March 17, 2003, Jason and Andrew Gennusa, former employees of the Company and founders of Manhattan Bagel Company filed suit
against us in the Superior Court of New Jersey, Monmouth County. As the founders of Manhattan Bagel Company, the plaintiffs claim to be
reproducing the "original formula" Manhattan bagel dough and selling it to franchisees at a competitive price. Their complaint seeks a judgment
declaring that their production and sale of this bagel dough to franchisees does not violate various non-competition covenants and confidentiality
agreements they previously entered into with us. Furthermore, the plaintiffs seek a declaration that the "original recipe" bagel dough they
manufacture is not a trade secret of the Company, and that their manufacture and sale of the dough is not in violation of intellectual property law.
We have not yet answered or otherwise responded to plaintiffs' complaint.
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